Smart credit limits save money for customers and banks

The credit limit you’re not using on your card is costing the bank money, and that’s increasing the cost for all customers’ cards.

Jonathan left a ‘big four’ bank to pursue his PhD at the University of Melbourne and the ARC Centre of Excellence for Mathematical and Statistical Frontiers, drawing on his experience to address a real-world problem.

Now, Melbourne mathematicians have developed a way of minimising this using the bank’s data on customer spending behaviour.

The unused credit costs the bank money because regulators require them to have funds in reserve – which they can’t invest elsewhere for profit – to cover the possibility you’ll make a large purchase and not pay the money back.

“It’s not a large cost, but it adds up and reduces overall profit,” says Jonathan Budd, a mathematician at the ARC Centre of Excellence for Mathematical and Statistical Frontiers who undertook his PhD at the University of Melbourne. “Banks recuperate that cost through interest charges and fees, which makes a credit card an expensive way to borrow money.”

Jonathan’s model uses an individual’s purchasing and payment behaviour to create a personalised estimate of credit ‘need’ from month-to-month. This would allow banks to tailor credit limits to individual clients and decrease this cost.

Jonathan says that in Australia, credit limits tend to be set quite high.

“In November 2015, the Reserve Bank of Australia reported that purchases were only 18 per cent of total card limits, meaning most people aren’t using their full credit each month,” he says.

“This is one way of applying the available data, but there are many other ways it could be used, which I’m keen to explore.”